Stochastic Oscillator

The Stochastic Oscillator measures the speed or momentum of price movements. It is used to identify bullish and bearish reversals. And since it is range bound it can also identify oversold and overbought levels.

The Stochastic Oscillator consists of:

  • %K Line (Blue Line)
  • %D Line (Red Line)

The 2 types of Stochastic Oscillators are:

  • Fast Stochastic (FSTO)
  • Slow Stochastic (SSTO)

 

Ways to Interpret the Stochastic Oscillator

Interpretation of the Stochastic Oscillator
Buy When the %K Line (Blue Line) crosses the %D Line (Red Line) upwards.
Buy When both the %K Line (Blue Line) and the %D Line (Red Line) are below 20.
Sell When the %K Line (Blue Line) crosses the %D Line (Red Line) downwards.
Sell When both the %K Line (Blue Line) and the %D Line (Red Line) are above 80.

 

Look for the Following Instances

Identify the Following Shapes
Identify a Bottom Forming When the Slow Stochastic Oscillator (SSTO) forms a basin.
Identify a Top Forming When the Slow Stochastic Oscillator (SSTO) forms an umbrella.

 

Look for the Following Divergences

Divergences
Identify a Bottom Forming When the price of the stock goes lower but the Stochastic Oscillator goes higher.
Identify a Top Forming When the price of the stock goes higher but the Stochastic Oscillator goes lower.

 

Example 1

Stochastic Oscillator 1
Source: Thinkorswim by TDAmeritrade

 

Example 2

Stochastic Oscillator 2
Source: Thinkorswim by TDAmeritrade

 

Example 3

SSTO
Source: Thinkorswim by TDAmeritrade by TDAmeritrade

 

Example 4

FSTO
Source: Thinkorswim by TDAmeritrade

 

My Financial Analysis of Stocks

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